An Examination of Determinants of India’s Intra-Industry Trade

Following the economic liberalisation that took place in the early 1990s in India, the share of intra-industry trade (IIT) in total trade has increased significantly. Various factors such as the rise in Per Capita Income (PCI), Gross Domestic Product (GDP), product differentiation, ease of entry for foreign firms and reduction in trade barriers have been found to be the major determinants of IIT. These determinants of IIT have varied from country to country. However, there is an issue of whether a country’s IIT is dominated by vertical IIT (VIIT) or horizontal IIT (HIIT). Various methodologies have been developed to examine this segregation. The present paperattempts to modify the existing methodologies related to segregation of IIT by attempting to identify the determinants of India’s IIT during the period of 1990-91 to 2015-16. The trends in IIT show that India’s IIT is dominated by VIIT though the HIIT is increasing at a higher rate over the period from 1990-91 to 2015-16. This study applies the Toda and Yamamoto method and also uses the modified Granger causality test to identify the causal relationship between IIT and its determinants. A unidirectional causality is observed from GDP, trade openness and PCI to IIT while unidirectional causality is found from EP and trade openness to HIIT.